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Exchange-traded funds are typically funds with lower management costs than other managed funds but seek simply to earn the same return as a particular market index. Gold ETFs attempt to offer investors the same return as physical gold without the logistical difficulties of physically purchasing and storing investment inventories of gold. If you anticipate that the price of gold will fall, short selling gold ETFs allows you to profit from the drop in value. Whether your position pays off or costs you, it’ll show up on your annual tax return the year you close it.

Gain

Short sales begin by selling stock and close by repurchasing the stock sold earlier. If your gamble pays off and the price of gold falls, you will realize a gain when you close your short position on the ETF. As with most investment transactions, capital gain is calculated by subtracting your adjusted basis from the revenue of closing your position. Your capital gain from a short sale of gold ETFs will be taxed at the preferential capital gains rate if you held the position for longer than a year or at ordinary income rates if you closed the position within a year.

Loss

Losses from a short sale are theoretically unlimited. The most you can lose on an ordinary stock purchase is the amount you paid to purchase the stock, but if the stock appreciates, there’s no set limit to your gain. Because you need to repurchase the stock to close a short sale, your losses can shoot almost as high if the price of gold skyrockets after you start a short sale. Losses from a short sale can offset gains from other investments, but if your losses exceed your gains, you can only use up to $3,000 each year to reduce your ordinary income. If you still have unused losses, you can apply them against future years. For example, if you lose $100,000 on a short sale of ETFs and made $94,000 off the sale of other investments, then you had a net loss of $6,000 for the year. You can reduce your ordinary income by $3,000, but you will have to carry the remaining $3,000 over to another year.

Short Sell Position

A short sell is a position that allows an investor to sell shares of stock without owning any shares. The investor pays a fee to borrow a number of shares, which she then sells. Later -- ideally when the price of the stock has fallen -- the investor closes the position by purchasing shares to return to the lender. For example, if a Gold ETF trades for $40, and you want to short sell 100 shares, you pay a rental fee and sell 100 shares for $4,000. Two months later, the Gold ETF trades for $10, so you purchase 100 shares for $1,000 to return and close out your position.

Basis

You report short sales on the same tax form, Form 8949, as regular sales of capital assets. Because short sales work like ordinary sales in reverse, you begin by selling and end by purchasing. Any fees and rents you pay to your broker to open the position reduce the sales price. When you close the position, any fees and commissions you pay add to the purchase price of the stock to form your cost basis. From there, gain or loss is calculated the same as any other transaction -- sale price minus cost basis.

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About the Author

Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.

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